OFT closed case: Completed acquisition by Arla Foods UK plc of milk business in Quinton, Birmingham from Midlands Co-operative Society Limited.
Affected market: Milk
The OFT's Decision on reference under section 22 given on 10 May 2004
Arla Foods UK plc (Arla) is part of a large European dairy products group. Midland Cooperative Society Ltd (MCS) is active in various sectors including grocery retailing, travel, the provision of funeral services and the provision of garage services. MCS is also active in milk processing and supplies milk primarily to the Midlands region.
Arla acquired milk business in Quinton, Birmingham from MCS (the Milk Business) on 30 January 2004. At the same time, MCS acquired milk business in Burton-on-Trent from Arla.
The statutory deadline is the 29 May 2004 and the administrative deadline is 10 May 2004.
As a result of this transaction, Arla and the Milk Business have ceased to be distinct. The parties overlap in the supply of milk to doorstep customers in the ACNielsen Midlands region and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met in a substantial part of the UK. A relevant merger situation has been created.
The Competition Commission (CC) examined this sector in detail in its report entitled 'Arla Foods amba and Express Dairies plc – A report on the proposed merger' (see [note 1]). The market definition and segmentation used in that report were used as a starting point for our investigation.
The CC defined the relevant market as the supply of fresh processed milk (see [note 2]), but to reflect the differing competitive constraints in each segment, segmented this further into the supply of fresh processed milk to: national multiples, middleground customers and doorstep customers.
This transaction does not involve the supply to national multiples, and so this segment is not considered further.
Middleground customers were described by the CC as a residual category (see [note 3]) and include a wide range of purchasers including all retail outlets other than national multiples, caterers, public sector purchasers, bottled milk buyers and wholesalers. This transaction resulted in an increment of less than 1 per cent to Arla's share of [25-30 per cent] (see [note 4]) of the supply of milk to middleground customers in the ACNielsen Midlands region (see [note 5]). This segment is therefore not considered further.
The majority of this transaction related to volumes supplied to doorstep customers. Doorstep delivery differs from other purchases of milk as it involves a delivery service element. Furthermore, milk delivered to doorstep customers is usually in glass bottles rather than non-returnable containers. The frame of reference used to analyse this transaction is therefore the supply of milk to doorstep customers.
The geographic frame of reference for analysing the supply of milk to doorstep customers is inherently local, as such customers are supplied by vehicles (typically electric milk floats) of limited range from a central depot and rounds must have sufficient density of customers to be viable.
The majority of the doorstep business transferred does not overlap with Arla's existing business. The CC believed that the competitive interaction between even contiguous rounds was limited (see [note 6]). Our third party enquiries have confirmed this view in this local area. No competition concerns therefore arise as a result of the areas without overlap.
There are some limited areas of overlap as a result of this transaction. Doorstep delivery has declined for a number of years, while the retail supply of milk has increased. For example, the rate of doorstep decline was 19 per cent for the 12 weeks to 29 February 2004 according to TNS Superpanel data. This would suggest that switching from doorstep to other forms of supply has taken place, and since these changes appear to continue, that such switching would remain a competitive constraint on doorstep deliveries. Third party enquiries in this local area confirmed this point. The parties have stressed that their pricing does not differ between areas in which there are other doorstep providers and those in which there are not, suggesting that they are constrained by other forms of milk supply. Given the constraints identified from other sources of supply in this local area, therefore, these areas of overlap do not raise competition concerns.
Barriers to entry and expansion
The main barrier to entry is the need to attain sufficient density of customers in a small geographic area to make a round viable. Given customers rarely switch between doorstep suppliers and the sector is in general decline, such a barrier may make entry unlikely. Third party evidence confirms that entry to doorstep delivery is extremely rare.
Doorstep customers are individuals and so there is little prospect of countervailing buyer power.
No vertical competition concerns arose as a result of this transaction.
THIRD PARTY VIEWS
Third parties were generally not concerned.
The areas without overlap do not give rise to competition concerns, as the competitive interaction between even adjacent rounds is limited. The areas of overlap do not raise competition concerns because of the competitive constraints identified from other sources of supply in this local area. Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the CC under section 22(1) of the Act.
- 15 October 2003, Cm 5983
- Para. 2.33
- Para. 2.55
- Figure replaced by a range at the request of the parties.
- This increment does not take into the account the simultaneous transfer of business from Arla to MCS.
- Para. 2.64